Publications: Notes at the Margin

Meaningless Long-Term Futures Prices (August 17, 2015)

 

The falling forward price says absolutely nothing about future supply-and-demand balances or the future price of oil. To repeat, forward prices tell us NOTHING at all. Unfortunately, the use and misinterpretation of forward prices is far too common. Economic forecasting organizations input forward prices into macro models to project future economic activity. Oil companies input forward prices into their planning models to estimate the profitability of projects under consideration. Investors factor forward oil prices into their allocation decisions. Each of these uses is inappropriate. This issue of our weekly report explains why.

 

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